Reference-Based Pricing – Coming to a Health Plan Near You?

I think you are going to hear more about reference-based pricing. Some history:

What stops a provider from charging whatever they want for care? Let’s say a doctor charges $200 to remove a splinter. If the patient were paying, she/he might try to negotiate the charge or get care elsewhere. But they are most often not. The payor is typically the health plan.

So, the concept of “usual and customary” arose, where the health plans surveyed prices throughout the market and determined the prevailing rate. Reimbursement to the patient was limited to that rate and the patient was “balanced billed” for any excess costs, in addition to their normal cost-sharing. Then along came the HMOs and “network” plans. The contract (or negotiated) rate became the basis for payment to providers and patients were billed plan copays. The two concepts were merged, and in-network care was reimbursed based upon contract rates and out-of-network care based upon prevailing or usual and customary (UCR) rates.

In order to discourage use of out-of-network services, the UCR was reduced from the amount which the 90th percentile provider charged, to the 70th percentile. And now, because of abuse by the providers, it is based upon Medicare allowable charges. All of this meant more balance billing to patients for out-of-network plans. And when copays for in-network care weren’t enough to control utilization in-network, cost-sharing and then high deductible plans were introduced, and patients had to refamiliarize themselves with cost-sharing. Very confusing isn’t it? All of this was to encourage patients to be consumers – but there was little success. The system is too confusing, and patients found it too complicated to shop for care.

Now there is a new payment model entering into the scene, known as “reference-based pricing” and it is catching on in some markets. The amount paid is based on a preset charge for each procedure code, and a multiple of Medicare’s reimbursement rate for hospital charges. The employee is given a tool to find providers willing to make services available for the preset rate. Typically, patients are free to use any provider, but charges in excess of the preset rate are not reimbursed and can be balance billed to the employee.

As expected, the first legal action related to a balance bill under a reference-based contract is underway. A Virginia hospital is pursuing an $84,000 balance bill. In May 2014, a Carter Bank & Trust employee had a heart attack and was admitted to Martinsville Memorial Hospital. This hospital did not have a contract with the bank’s health plan and they received a bill for $111,115. The insurer paid $27,254 to the hospital based upon the reference-based reimbursement rate (which was in excess of 100% of the Medicare rate) under the plan. The hospital balanced billed the patient for the remaining $83,861. While lying in the hospital bed, he signed a “Consent for Services and Financial Responsibility,” as anyone facing a life-threatening moment would do. It will be interesting to see what the courts do with this action.

Reference-based pricing seems more rational, transparent and can be a more cost-effective method for paying for healthcare, and with an open network there are no networks to manage. This should make patients better consumers. They would have a very direct, vested interest in finding out exactly what procedures will be performed and what it will cost. Unfortunately, not only is healthcare very confusing but the more significant costs are often borne at a vulnerable time – when illness or injury takes precedence over cost considerations.

The other problem is that providers aren’t taking the payment they receive lying down. They can – and often will – aggressively pursue excess charges from the patient. This is causing friction between the patients, the plan sponsors and the providers. But costs are out of control. Under the present system very little time is spent making price-based healthcare decisions even though these costs consume almost 20% of our gross domestic product. Look at what the power of the consumer has done for the price of televisions and cars.

About Craig Hasday

Craig Hasday is President of EPIC Northeast Benefits and President of Frenkel Benefits. As part of EPIC Insurance Brokers & Consultants (EPIC), Frenkel Benefits is one of the largest privately held independent employee benefits brokers in the United States.
Craig is a nationally recognized healthcare leader, who has sat on the national advisory boards of Aetna, UnitedHealthcare, Cigna and Anthem; as well as the regional advisory boards of most major carriers. He is currently on the MetLife and GeoBlue national advisory boards, is a legislative group member of the Council of Insurance Agents and Brokers and has been appointed to the MetLife National Broker & Consultant Summit. With current and former roles involved in lobbying and advisement on the legislative landscape, Craig is deeply engaged with the issues and intricacies surrounding healthcare delivery. He is an appointee to Governor Cuomo’s Regional Stakeholder Exchange Board and member of the NAHU Principals Council – as a liaison to the White House, U.S. Department of Health and Human Services (HHS), the U.S. Treasury and Congress – to advise on the practical issues associated with healthcare reform.
He has served as legislative chairperson for the New York State Association of Health Underwriters. Craig is also a former board member of the NAHU Education Foundation and has sat on the Global and Domestic Benefit Advisory Boards of Assurex Global. He is on the board of the NAHU Foundation and is a member of the UnitedHealthcare Children’s Foundation Regional Board of Directors.
Craig was honored with the International Benefits Network’s 2017 Service Excellence Award and selected as a 2015 Power Broker by Risk & Insurance Magazine. He is a frequent speaker on a broad array of issues affecting the insurance industry and is an adjunct professor in the New York University Masters of Human Capital Management Program.
Craig has appeared on CBS, NPR and other news programs as a healthcare commentator and is widely published and interviewed by the media as a benefits expert. As a judge for the 2014 and 2015 Business Insurance Benefit Manager of the Year awards, he contributes his benefits expertise toward selecting this prestigious award’s winner. Craig can be heard on WCBS Newsradio 880 during the daily business report speaking about healthcare and employer strategy in a segment titled, FrenkelySpeaking, which is based on the Frenkel Benefits’ blog.
Craig joined Frenkel in 1992, as the manager of what was then the Life & Employee Benefits department. Under his leadership, Frenkel Benefits has expanded almost twelvefold in revenue, now serving almost 800 clients across the U.S. and globally. Now together with EPIC, Frenkel Benefits is a significant contributor to EPIC’s benefits business.
Craig is a New York State CPA, formerly working in the New York office of a big-four accounting firm. He has experience as an audit and tax professional, chief financial officer and a small business owner. This diverse background brings an in-depth appreciation for the challenges facing clients.

Yes, there was an appeal and the case went to the Supreme Court of Virginia. They disagreed with the original ruling and sent it back to the Circuit Court to figure out. Still waiting on the final verdict.

Being a knowledgeable and prudent consumer of health services is critical in today’s high tech, high cost environment. When I was a child, medical services revolved around setting bones, wrapping joints, lancing boils, prescribing antibiotics and doing the occasional appendectomy. Times change and, with every new technological advance, medical care becomes more complicated, expensive and confusing.

Certainly it’s important for a patient to make valued decisions about the type of care they request and receive, and asking cost information is an integral part of that. However, you touched on the trapdoor with that process when you wrote, “the more significant costs are often borne at a vulnerable time – when illness or injury takes precedence over cost considerations.”

It’s easy to be a prudent consumer when you’re getting your annual physical and need to question a supplemental test that you doctor would like to do or when you’re shopping for a knee replacement. It’s more difficult to do that when you are in an unexpected emergency situation and your mind is focused on survival, not economics.

I’m in my own $25,000 battle right now over a heart catheterization for which pre-authorization was requested by the provider, but they elected to do the procedure before that authorization was granted by the insure.r On that basis payment was denied and I’m responsible for the bill.

Our healthcare insurance system is broken and, by all appearances and evidence, every time the insurance industry or government tries to fix the problems, it gets worse. The world is full of universal healthcare systems. Some work well and some fail in epic ways. The liberal left in politics hail the former and the conservative right warn about the latter. I’ve spent my life as an engineer solving problems and every fiber of my being tells me that, in today’s medical environment, the time has come to pursue universal healthcare. But to do it effectively would require bi-partisan commitment and cooperation on a level that I’m not sure is possible in today’s divisive political arena. I fear that the days of meaningful cooperation in American politics on crucial subjects are over.

I feel your pain and spend a significant amount of time advocating for people like you. I am not trying to be self-serving when I say healthcare is too important not to have the very best advisor as your advocate. Clearly our system is far from perfect – there are safeguards, but you are 100% correct when you acknowledge that they happen at the most vulnerable time. In your situation – I would say that the doctor should have some culpability in moving forward without prior authorization, and if I were in your position I would make that clear to the provider. It wasn’t a vulnerable time for them and they have certainly fought the insurance carrier battle before. Recognize that universal healthcare is just another forum for the battle over healthcare decisions – it is in no way a perfect system either. In particular, the most vulnerable (i.e. costly) patients don’t have it easy as they battle for treatment which may be rationed or unavailable.

You’re absolutely correct Mr. Hasday; there is no perfect system. But part of the issue with our system is that we are dealing with a perfect storm of complexity caused by high tech medicine and pharmaceuticals slamming headfirst into a hodge-podge of varying insurance plans and programs vying for their piece of nearly one fifth of our total GNP. No one can adequately wrap their arms around the monster that we face, not insurance companies, not providers and certainly not consumers. When faced with a problem with multiple causes, the best solution is to focus first on the parts that you can impact the most and tackle the rest when the problem is more manageable. Simplifying the insurance aspect is faster and easier to do than attacking the cost of high technology.

You’re also right that there is some degree of rationing involved with universal healthcare. That’s almost a given when limiting resources becomes a factor. But truthfully, is our system any different? Does it make a difference whether it’s an insurance company telling you that your wife can’t have the high cost chemotherapy her provider wants to prescribe for breast cancer or whether it’s a central government agency?

Many years ago I worked for a company that had a Canadian facility and I became, and still am, good friends with many of the folks who worked there. Two years ago, one of them needed a hip replacement. His physician went through the approval process and he had to wait four months for a surgery spot to become available. He had the surgery, which cost him nothing out of his pocket other than what he paid for medication afterwards. Had he been in the United States and insured, he probably could have had the surgery within a month. But there would still have been an approval process and, if there was any doubt that the surgery was essential, it still could have been denied. Beyond that, the out of pocket costs for the patient would be substantial.

Several years ago I spent a week fishing on Crow Lake in Ontario with a few of my Canadian friends. The days were spent fishing and the evenings were spent playing cards and solving the world’s problems over an endless supply of cold beer. During one of those evenings the subject turned to healthcare and I made the mistake of asking whether any of them wished that they could exchange their healthcare system, waits and all, for ours. It’s embarrassing when four good friends all drop into uncontrollable laughing at something you say.

The U.S. spends nearly 18% of its GNP on health care. Canada spends 10.5% and the average of countries with our level of economic performance is 10.6%. Switzerland is the closest to our level of expenditure and they only spend 12.5%. It might be worth the extra money if we lived longer here, but we don’t. It appears that they all know something that we don’t.

I’m not trying to be argumentative, I’m just frustrated. I’ve survived for 45 years as an engineer by adhering to two tenets. 1) If it’s not broke, don’t try to fix it. 2) If it is broke, don’t walk away until it is fixed. Our healthcare system is broken and it’s not going to fix itself.

I’ve enjoyed many of the articles in your blog. They’re interesting and informative. Please keep them coming.

My writings are pretty much aligned with everything you say. There are no easy answers or fixes to our healthcare system. If we adopted single payor – there would be equally loud voices bemoaning the inequities of that system. Personally, I can get past the number of people that cross onto our borders for care – that says something about healthcare in those countries.

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Please be aware that this does not represent legal or tax advice and is only Frenkel's interpretation of the laws, regulations and statutes. It is highly recommended that you seek the advice of your legal and tax professional as to the applicability of this information to your particular situation.